5G wireless technology, which is being deployed over the next few years, and Narrowband IoT--another new effort--are new networks that could conceivably take away some of his company’s business by providing either more powerful, or cheaper, options for connecting meters and everything else.

In January, the company closed on the purchase of Silver Spring Networks, a once-hot Silicon Valley start-up in the realm of “smart metering," adding computer, network, and software intelligence to utility boxes to let utilities do more.

A network of smart devices

Itron has 186 million meters around the world, 90 million of them “smart” meters that are connected to a network over either wireless links or power lines, so they can be read remotely.

Increasingly, Itron sells a bundle of services and software on top of that. Its most sophisticated meters are full-blown computers running the Linux operating system. It is rolling out an app store of sorts to sell applications that, on those meters, take advantage of all the sensors in the box. Things such as smart cities and other IoT applications may be made possible by the technology.

Tying it all together are communications networks Itron helped to build and that are owned by the utilities—though, in more and more cases, they are run by Itron on behalf of the utilities for a fee.

That network—he calls it the “canopy”—covers more than 2.5 million square miles just in North America, mostly in large urban areas.

Mezey likes to offer examples of how the utilities are getting smarter with Itron’s technology. Florida Power & Lightwas able to recover more quickly from last year’s brutal storms by using connected meters to ascertain conditions on the ground. ConEd is installing an underground communications network in New York City to know where and when power is down in thesubway system, and thereby speed recovery efforts.

Stepping up the game

Over the years, Itron had lost the plot, says Mezey, who took the top spot in 2013, and who has been with Itron since 2003.

"We had a lot of people internally who thought the goal was to sell meters,” he reflected. “But it was really not about that, it was about that data you are collecting via those meters.”

"We got labeled as a metering company, but we had always been a communications company. We had to step up our game,” said Mezey.

To Mezey, the Silver Spring deal, for $879 million in cash, is a story of how the strengths of an established firm are rejuvenated by the virtues of a young company, and the weaknesses of a start-up rescued by greater resources.

"One of the reasons Silver Spring didn't succeed is they didn't actually make anything,” says Mezey. The company was a software and services company, period, with no tangible product. By contrast, Itron has all those millions of meters installed around the world, whose code and hardware it has assembled itself in its own factories.

That means that Itron has meters that generate not only billions in upfront sales and long-term contract sales—nearly $2 billion in annual revenue—but also a nice repeat business of selling follow-on parts to its customers.

But now Silver Spring is going to allow the company to move into the new world of IoT, by connecting a whole host of devices, starting with meters today but extending to street lamps with built-in smarts, and any other kinds of sensing that cities, municipalities or private customers might want down the road.

All that leads to more and more software and services that Itron hopes to sell on top of the basic meter sale.

The expanding profit picture

Software and services has historically been less than 10% of Itron’s revenue. Last year, the company started to break out numbers for software and services in its financial reports, and there is a goal to get the company to 20% of revenue coming from software and services over time.

Software and services can contribute to contract deals, which can be enormous. ConEd's project for the New York subway is a $1.3 billion plan, involving deployment of 4.7 million smart electric and gas meters. Itron doesn't get the whole contract value, but for its part—deploying the network to connect those millions of meters—it may take as much as 10% to 20% of the total contract. That means a single deal with a utility can bring in $100 million or more in revenue.

Moreover, contract deals of this sort build up the company’s backlog, which is something investors like to see: future revenue that is almost "in the bag," so to speak.

Backlog was at $1.75 billion at year end, but will rise to over $3 billion with the addition of Silver Spring. Moreover, "Backlog is accretive to reported gross margins,” Mezey points out, a nice extra benefit.

The software and services component tends to be “highly recurring” in nature, too. Mezey is aware the Street would love know more details about recurring revenue, and he suggests with a smile it’s something that may be forthcoming from Itron in the future.

At the same time, Mezey has been cutting costs by moving some manufacturing to contract builders such as Flextronic (FLEX), though Itron will continue to retain a substantial amount of its own production capacity. In his words:

We analyzed our markets, and our portfolio, and we said no to some markets, and we pruned our low-profit-contribution businesses. The electricity market in Brazil, for example, was very difficult for us. We pulled out of there. We narrowed our focus in Africa. We exited the electricity market in Spain entirely. In that case, the Spanish utilities had become an auction market, and it was all about cutting out costs, there was no interest by those utilities in adding value. So, it took fortitude, but we exited.

We had captive manufacturing around the world, and we have consolidated that, and outsourced some of it to others. Our COO came from Flextronics, and Freescale before that, and he had worked on sensing and networking, and brought with him a team of people who had done outsourcing. That’s helping us to get better product gross margin. Just look at our electricity unit, it was losing money, and we've now not only turned that around, we’ve exceeded our profit goals.

The bottom line with all this is that increasing smarts can improve profitability. Since Mezey took over, the company’s earnings per share, on a GAAP basis, went from a loss of $3.74 in 2013 to a profit last year of 83 cents; on a non-GAAP basis, things improved from a profit of $1.90 to $3.06 last year.

The company’s Ebitda margin improved to 12% last year from 7% three years ago, and Mezey has told the Street that will rise to the mid-teens this year and hopefully to the high teens in subsequent years.

It’s done good things for the stock, which is up over 60% the last five years.

Cutting staff

There’s been a cost as well, though, in layoffs. The company has gone from 8,200 workers in 2013, including temporary employees and contract workers, to 7,800 last year as it cut some manufacturing operations. Full-time staff is down to 6,500.

“That number will continue to come down,” says Mezey. Asked if morale suffers from the layoffs, Mezey replied, "It does take a toll on a company."

He told me the “people in the factory are incredibly courageous, and they understand you have to embrace automation and cost containment, but you have to explain to them why you’re doing things, what your reasoning is."

"But it's hard,” he concedes. I asked if job retraining can help.

"We end up frankly hiring younger people with new skills, and not retraining our existing staff,” he said. Eventually, he seemed to indicate, there is a place for retraining, but "we have to become a strong and sustainable company first."

Walking a fine line between IoT and 5G

There is the threat, over the next five years, that shiny new networks from the phone companies—Verizon Communications (VZ), say, or AT&T (T)—or even one of the cloud-computing operators, using 5G, could push aside the Itron network and grab all the business of a future connected world of IoT gadgets.

Mezey likes to say Itron is somewhere between the very low-tech world of the Narrowband IoT and the ultra-high-tech world of 5G.

The former, he contends, have virtually no smarts in the networks of devices they are building.

“With some Narrowband approaches, they have made a decision about capabilities, they are going to save costs, do it inexpensively. And if all you wanted to do was to read the meter, than narrowband IoT would be fine,” he says.

"But we now have a full Linux computer embedded in the meter; and we are adding more technology all the time. They can’t do that with Narrowband IoT: they can’t both save costs and bring more and more intelligence to these devices."

Moreover, the current Narrowband IoT plans don’t really seem to know a lot about the water-in-the-manhole problem, he points out: They are designed for indoor communications, not for the rugged outdoors, or the sewers.

5G, in contrast, is a massive upgrade to carrier networks that seems to presume a somewhat ridiculous amount ofcomputing at every single connected device, no matter how large or small.

"People imagine a 5G modem will go into every parking meter, every street light,” he reflects.

"People are imagining this use case of, you need superlow latency, but in an RF world, you have to manage the tradeoffs, you have to manage the cost of all that. And remember, we have to have 20-year battery life we have to guarantee in devices we put out there in the field."

Then there may be some very practical problems for 5G, he imagines.

“We have perfected the art of the sub-basement situation,” he says, referring to how a cellphone loses its signal when you go to check the gas meter in your basement.

"Is it possible this new technology will come along and disrupt all that?" he asks. Yes, it is possible, he says, but as he notes, Verizon already works with Itron to place the company’s network traffic on the main communications links. He sees Itron as driving cost and complexity to the “edge” of the network, another hot buzz term.

In this brave new world, Itron might just be an interesting bet on a form of edge computing that can survive and thrive despite the onslaught of 5G.

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